GT Bank 9M 2019; Good Numbers, But A Howler In Loan Asset Growth


Saturday, October 26, 2019 / 5.00PM / TheAnalyst/Header Image Credit: Proshare


GT Bank's 9 months 2019 financial results is a sweet pot of peppered soup. The ingredients are a coloured mix of top line earnings decline, bottom line growth and major cost of risk (CoR) deceleration. But the bank's service quality (a qualitative assessment of the bank's retail activities) has sputtered to a slow grind as its over-the-counter enquiry resolution mechanism has stayed sluggish and sometimes frustrating, not only does the bank seem to have had a problem with its time-to-service (queue management) processes, it also appears to be struggling with its overwhelmed customer relationship desks.

Highlights of GT's financials ending in September 2019 play up its increased retail market penetration and its struggle with expanding credit without compromising loan asset quality.


  • Gross Earnings fell by -3.17% from N334.8bn in September 2018 to N324.2bn in 9 months 2019
  • Net Interest Income climbed by +0.75% from N172.94bn in September 2018 to N170.64bn in 9 months 2019 (mainly as a result of a -23.3% fall in interest expense)
  • Profit after tax edged up marginally +3.3% between September 2018 and September 2019, a modest growth in after tax profit
  • Loans and advances went up by +9.44% Y-o-Y, rising from N1.26trn in September 2018 to N1.38trn in September 2019
  • Customer deposits equally grew between 9 months 2018 and 9 months 2019, rising from N2.27trn in 9 months 2018 to N2.39trn in 2019, a growth of +5.13%
  • Net Margin went from 42.48% in 9 months 2018 to 45.34% in 9 months 2019 representing a rise of +2.86%
  • The banks loan to deposit ratio, LDR, between December 2018 and 9 months 2019 sprang from 55.4%   in December 2018 to 57.6% in September 2019, or -2.6% lower than the CBN baseline minimum LDR of 60% by the end of September 2019 and -7.6% from the 65% set by the regulator as the minimum LDR required of banks by December 2019.


Chart 1 GT Bank Top line Earnings Numbers 2015-2018

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Source: GT Bank Annual Financial Statements 2015-2018


Chart 2 GT Bank Bottom line Profit Numbers 2015-2018

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Source: GT Bank Annual Financial Statements 2015-2018

Top line worries

A recent report by international consultancy firm, McKinsey Consulting, elaborates on the challenges banks around the world are having coping with slow global economic expansion and increasing pressure on the quality of risk assets in respective countries. Compression of top line earnings of banks around the world signpost a rise in business risk for financial service providers such as deposit money banks (DMBs). According to McKinsey's researchers in a report they recently titled 'The Last Pit Stop? Time For Bold Late-Cycle Moves', they noted that, "A decade on from the global financial crisis, signs that the banking industry has entered the late phase of the economic cycle are clear: growth in volumes and top-line revenues is slowing with loan growth of just four percent in 2018-the lowest in the past five years and a good 150 basis points below nominal GDP growth. Yield curves are also flattening. And, though valuations fluctuate, investor confidence in banks is weakening once again."

The authors point out that, "Global return on tangible equity (ROTE) has flatlined at 10.5 percent, despite a small rise in rates in 2018. Emerging market banks have seen ROTEs decline steeply, from 20 percent in 2013 to 14.1 percent in 2018, due largely to digital disruption that continues unabated. Banks in developed markets have strengthened productivity and managed risk costs, lifting ROTE from 6.8 percent to 8.9 percent. But on balance, the global industry approaches the end of the cycle in less than ideal health with nearly 60 percent of banks printing returns below the cost of equity. A prolonged economic slowdown with low or even negative interest rates could wreak further havoc."

The decline of economic activities in Nigeria (the economy grew by a modest +1.94% in Q2 2019) appears to have flatlined income opportunities for local lending institutions, thus resulting in GT Bank's Gross Earnings between December 2018 and September 2019 sliding down by -3.17%. The dip may not have significantly hurt the bank's bottom line but it certainly weakened what would, otherwise, have been a stronger nine-month performance in 2019 (the bank's topline gross earnings growth has been fairly modest over the last three financial years (see chart 1 above), but its bottom line numbers have been traditionally pacier (see chart 2 above)).

GT Bank's chief executive officer (MD/CEO), Segun Agbaje, has repeatedly emphasized that the bank was not in the race for revenue and asset size but in competition for scaled overall business growth and underlying profitability (supposedly reflected in the banks return on average equity, ROaE of 33.7% in September 2019), and this seems to have been evidenced by the character of the bank's 9 months 2019 income statement, where the bank's weaker topline revenue still saw a marginal growth in its bottom line number, with profit after tax rising from N142.2bn in December 2018 to N146.9bn in 9 months 2019,representing a growth of +3.35%.

Both Interest Income and Interest Expense dipped during the year, but net Interest Expense fell far steeper (-23.39%) than Net Interest Income (-5.62%), leaving the bank's Net Interest Income growth rate slightly positive at +0.75%. The faster falling Interest Expense relative to its Interest Income suggests that GT has strategically pushed down borrowing costs as it expanded its deposits from customers (customers deposits grew by +5.13% between December 2018 and September 2019). The growth in deposits at lower costs raise interesting issues of loan to deposit (LDR) growth and bank liquidity.


Flush with Liquidity, Skinny on Bankable Assets; The New Hobbesian Dilemma

The CBN's recent policy guideline on lending requires banks to lend at least 65% of their deposits to individuals and businesses that have bankable proposals. The rise in the LDR means that banks rather than pay a fine of 50% of the difference between their  required lending and actual lending, would prefer to create new credit assets at lower interest rates, but are finding this difficult with the economy growing at such a slow pace; new bankable businesses are getting tougher to uncover.  The inability to easily translate deposits into loans has become local banker's new Hobbesian dilemma; they are damned if they don't and damned if they do.

Between December 2018 and September 2019 GT Bank's loans and advances grew by +9.44% ahead of the +5.13% advance in its deposits but less than the rate required to meet the CBN's previous 60% loan to deposit ratio (LDR) requirement, thereby resulting in a penalty of N25bn (see chart 3 below).


Chart 3 CBN Debits to Banks in Default of 60% LDR Requirement Sept. 2019

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Source: Central Bank of Nigeria (CBN)

Since the debits by the CBN will go into increasing banks cash reserve requirements (CRR), banks with large debits will suffer margin squeezes as they are compelled to place their cash in assets that earn zero interest rates as against the risk -free rate of between 13 and 15% earned on T-bills.


Short Selling for Profit

A further notable aspect of the business activity of GT Bank over the first 9 months of the year has been its busy trading in Treasury bills on margin. The heavy T-bill activity is reflected in the spike in its liability line item for short T-bill transactions which rose from N1.76 bn in December 2018 to N5.62 bn in September 2019, a rise of about 219%. 

Bolstering income further was the noticeable rise in fee and commission income from N40.35bn in September 2018 to N48.38bn in September 2019, a growth of +19.90%. A large part of the increase in this Income Statement Item was the result of a +37.18% rise in credit-related fees and commissions from N5.89bn in September 2018 to N8.08bn in September 2019. In addition, the bank grew its E-business income from N6.77bn in the first 9 months of 2018 to N11.04bn in the 9 months ending September 2019, or what amounted to a rise of +63.07% on its E-business earnings. Growth also came from FX commissions which rose from N4.68bn in the first 9 months of 2018 to N5.45bn in the first three quarters of 2019, a rise of +16.45%GT also made strong commissions for touchpoint services which grew from N914.87m in 9 months of 2018 to N1.35bn in the first ninth months of 2019, representing a +47.70% rise in touchpoint income growth.

Bearish on Derivatives

The bank may have been bullish on Treasury short sells but it was bearish on derivative instruments as derivative liabilities fell from N3.75bn in September 2018 to N1.67bn in September 2019, a fall of -55.47%.


Loan Impairments Without IFRS9 Adjustments

Adjustments for the International Financial Reporting Standard (IFRS) 9 rules concerning treatment of non-performing assets provision showed up strongly in the bank's 9 months 2019 performance, with impairment charges reversing from a day-one adjusted write-back of N295.2m in September 2018 to a charge-off of N575.61m in September 2019. This obviously indicates that the bank will need to accommodate larger write-off figures by year end 2019 compared to full year 2018 when the bank was allowed to remodel impairment to the previous year (2017) level for the first year of IFRS9 accounting adjustment (or what was called "day one" adjustment). Nevertheless, the bank's loan impairment charge as a proportion of loans outstanding at 0.20% remains strong and healthy. 


Getting Service Delivery Right

From its financials in 9 months 2019, GT Bank had a modest performance in terms of profit growth, but showed a tapering of its topline performance. Notionally, customers of the bank have complained about a decline in the quality of the bank's service delivery which seems to be the result of a sudden surge in its retail service base as banking customers took a flight to safety post banking meltdown between 2016 and 2016. The rise in the number of the bank's customers has put severe pressure on operations.

However, the banks Unstructured Supplementary Service Data (USSD) remains one of the best-in-class and has relieved some of the early frustrations of customers as the banks Automated Teller Machines (ATMs) have also been majorly functional with short cash dispensing cycles.

Like other banks GT Bank's principal challenge in Q4 may likely be how to meet the CBN's 65% LDR requirement without hurting its NPL to Loans ratio. In the context of a local Nigerian adage, "The bigger the head, the bigger the headache", few envy bankers at times like this.


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